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Earned wage access: What is it and why does it matter?

Pinwheel Team

March 9, 2022

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The popularity of earned wage access (EWA) products has skyrocketed. From 2018 to 2020 alone, the total value of wages that employees withdrew before payday nearly tripled from $3.2 to $9.5 billion. Also known as on-demand pay, EWA allows employees to receive their pay as they earn it instead of waiting for a specific payday.

While flexible access to wages can benefit everyone, EWA providers can have the biggest impact on low-income households living paycheck to paycheck. Sixty-one percent of Americans aren’t able to cover $1,000 in unexpected expenses with money from their savings and instead resort to loans or borrowing from friends and family. But real-time access to wages can help them cushion the financial blow and keep them out of debt.

In addition to benefitting consumers, on-demand pay is transforming banking and work — employers, fintechs, and financial institutions have been busy launching new EWA services. If their recent growth is anything to go by, EWA could become a staple of future consumer finance products.

What is earned wage access, and how does it work?

Traditionally, employees received their salary on a fixed pay cycle, such as on a bi-weekly or monthly basis. While this model is still prevalent, in recent years, another more flexible way of accessing wages has emerged: earned wage access. It allows employees to withdraw their wages at their own convenience, providing them with the means to cover unexpected costs or bills due before their typical payday.

Consumers can access on-demand pay in two ways — via an employer who offers the service through an EWA provider or a fintech company that provides EWA directly to consumers. Providers may charge a small fee for the transaction, but some employers cover the costs to make the service free for their workers.

On-demand pay providers initially geared the service toward low-income hourly workers in the service industry. They are more likely to live paycheck to paycheck without any savings to dip into in case of an emergency.

Recently, the service has spread to industries such as healthcare, where companies use EWA as a benefit for nursing professionals. In tech, PayPal recently launched an EWA program for employees in the U.S. and abroad.

Some of the first EWA providers, such as Payactiv, appeared in the early 2010s. A decade later, they have demonstrated the power to change the entire financial landscape, with benefits across the board.

Employees will benefit from a fairer financial system

When workers have access to instant pay, they can avoid high-interest payday loans, missing bill payments, incurring overdraft fees, and going into debt.  Today, 56% of Americans live paycheck to paycheck, and one in four has no emergency fund set up. The annual percentage rate (APR) on a $300 payday loan can range from 138% to 664%, which often leads to more debt and even bankruptcy. To this segment of the population, EWA can make the difference between being able to afford an unexpected expense and falling into a debt trap.

Overdraft fees are also a costly consequence of running out of funds before payday. In 2021, fees for going into overdraft reached a record $33.58. And they disproportionately affect low-to-moderate income consumers, who are 2X more likely to overdraft their bank account.

Research has shown that workers would use EWA to pay for items such as groceries, utilities, and rent or mortgage payments — not unnecessary purchases. With more control over access to their wages, employees can stress less while steering clear of predatory loans and protecting their financial health. And they’ll be able to better focus and be more productive at work which will also benefit employers.

Financial service providers can draw in more consumers

Just as companies use EWA to recruit employees, so can financial service providers to attract more clients. In recent years, neobanks and other consumer-facing fintechs have ramped up competition in the financial industry, increasing the pressure of launching innovative products to retain existing and draw in new customers.

While employer interest in offering on-demand pay is rising, not every company will find it feasible to implement, which opens doors to legacy institutions and fintechs to step in.

By launching EWA products, financial service providers can service a considerable consumer group — 77% of Americans would use EWA if their financial institution provided it. And more than half (56%) of EWA users began using the service in the last 12 months, a clear indicator of the service’s growing demand.

Pinwheel powers earned wage access through income data

Financial service providers can use Pinwheel’s API to access an employee’s income and employment data, which also includes information about paystubs and how many shifts a person has worked. Considering EWA is especially beneficial to hourly workers, having access to shifts and paystubs data is key. With this payroll data, providers can power EWA solutions and allow their customers to experience the benefits of on-demand pay.

Our API makes it possible for companies who wish to expand into the EWA space to do so quickly, and they can rely on Pinwheel’s connectivity to more than 1,500 platforms. The extensive payroll coverage is a key advantage, as it increases the number of customers companies can service.

Considering EWA's rapid rise in popularity, there’s no doubt it will be a feature financial service providers will want to keep on their radars.